Market Equilibrium
Market Equilibrium
• Equilibrium in a market occurs when the
price balances the plans of buyers and plans
of sellers.
• The equilibrium price is the price at which
the quantity demanded equals the quantity
supplied.
• The equilibrium quantity is the quantity
bought & sold at the equilibrium price .
Price as a Regulator
• The price of a good regulates the quantity
demands and supplied.
• If price is too low , the quantity demanded >
the quantity supplied , and we have a
shortage . The shortage bids up price till we
reach equilibrium.
• If price is too high , the quantity supplied >
the quantity demanded , and we have a
surplus . The surplus e bids down the price till
we reach equilibrium.
A Figure Shows Equilibrium
P
P2
D
A Surplus
S
P*
P1
A Shortage
q*
Q
Market Equilibrium
Table p. 68 shows :
The equilibrium price at which Qd = Qs
Above the equilibrium price :
Qs > Qd
A surplus
Below the equilibrium price :
Qd > Qs
A shortage
Price per
unit
Qd
Qs
Shortage (−)
Or
Surplus (+)
millions of bars per week
0.5
22
0
− 22
1
15
6
−9
1.5
10
10
0
2
7
13
+6
2.5
5
15
+10
Price Adjustment
A shortage forces the price up:
• When there is a shortage ,producers raise
the price. When price rises Qd decreases and
Qs increases until we reach equilibrium.
A surplus forces the price down:
• When there is a surplus ,producers cut the
price. When price falls Qs decreases and Qd
increases until we reach equilibrium.